We’re in week number two of cocooning and there’s no firm date when we’re going to emerge. This new normal, albeit temporary, requires that we adjust our daily routines and pace. Capital markets continue to their own journey through this nebulous period. Over the past month, we’ve seen record-setting down and up days as markets adjust to incremental COVID -19 statistics, efforts to slow its spread, and government stimuli to cushion the fallout that comes with an economy suddenly shifted into neutral.

We are starting to see the scales become more balanced between bad news and good news despite the uncertainty.  Since mid-February, when equity markets peaked, the flurry of profit warnings, shutdowns, and deteriorating economic forecasts went mostly unanswered. A perfect storm for capital markets. In the last few days, as the flow of incremental bad news has tapered (for now?), governments have formally unveiled massive amounts of fiscal and monetary stimulus to ease the burden facing individuals, families, and businesses. We view these government actions as important short-term economic measures, but ultimately the real good news will be improving COVID-19 case statistics and the eventual reopening of our societies and economies.

We Think Calling a Market Bottom is Futile

The length of the shutdown is one of the primary variables in our short-term investment strategy, with a longer closure associated with greater economic and market impact. The other variable is more tangible: how much the market already declined. Acknowledging that there’s no exact science, we would suggest the scenario currently being discounted by the markets is for a 3-6 week shutdown and a longer period of economic recovery. A longer shutdown would then equate to further downside risks, while a restart within a 3-6 week period could mean that we may be close to a market bottom.

Our asset allocation-based investment strategy guides us to reduce equity exposure when valuation is high and to build equity exposure when valuation is attractive. With a relatively conservative positioning at the beginning of the year, our plan has been to gradually raise equity exposure now that valuation is cheaper. Recognizing that we’re in a marathon, we have been adding Canadian banks, U.S. technology, and topping-off existing portfolio positions at a measured pace over the past several weeks and expect to maintain a gradual pace in coming weeks depending on the flow of information.

Market volatility will remain commensurate with heightened uncertainty in the short-term.

In particular, we think a sharp acceleration in COVID-19 cases in coming days combined with historically weak economic data could roil market sentiment. We are confident that our disciplined plan, executed with patience, should prove fruitful in the months to come when life starts to return to normal.